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Rating Action:

Moody's says Rite Aid's proposed Tender Offer is a distressed exchange; PDR downgraded to Caa3-PD

18 Oct 2019

New York, October 18, 2019 -- Moody's Investors Service ("Moody's") today stated that if the tender offer announced by Rite Aid Corporation on 15 October 2019 proceeds as outlined, it will constitute a distressed exchange, which is an event of default under Moody's definition of default. The Company announced that it recently completed a privately negotiated purchase from a noteholder and its affiliated funds of $84.1 million aggregate principal amount of its senior unsecured notes maturing 2027 and 2028 at 61% of par. The company also announced that it has commenced cash tender offers to purchase up to $100 million aggregate principal amount of its senior unsecured notes due 2027 and 2028. The Company intends to fund this privately negotiated repurchase and the tender offers with borrowings under its senior secured revolving credit facility and other available cash.

As a result, Moody's downgraded the company's Probability of Default rating to Caa3-PD from B3-PD. Moody's also downgraded the company's Corporate Family Rating to Caa1 from B3. Additionally, Moody's downgraded the rating of the company's senior secured revolving credit facility to B2 from B1 and its senior secured FILO term loan to Caa1 from B3. The company's guaranteed senior unsecured notes were downgraded to Caa2 from Caa1 and senior unsecured notes were downgraded to Caa3 from Caa2. Rite Aid's speculative Grade Liquidity rating was downgraded to SGL-3. The outlook remains negative. We expect to upgrade the PDR to Caa1-PD/LD upon the closing of the tender offer. Subsequently the LD designation will be removed after three business days.

Downgrades:

..Issuer: Rite Aid Corporation

.... Probability of Default Rating, Downgraded to Caa3-PD from B3-PD

.... Corporate Family Rating, Downgraded to Caa1 from B3

.... Speculative Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2

....Senior Secured Revolving Credit Facility, Downgraded to B2 (LGD2) from B1 (LGD2)

....Senior Secured Term Loan, Downgraded to Caa1 (LGD4) from B3 (LGD3)

....Gtd. Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2 (LGD5) from Caa1 (LGD4)

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa3 (LGD6) from Caa2 (LGD5)

Outlook Actions:

..Issuer: Rite Aid Corporation

....Outlook, Remains Negative

RATINGS RATIONALE

Rite Aid's Caa1 rating incorporates it's weak market position as it lacks the scale or the balance sheet to compete effectively with much larger and well capitalized competitors like CVS Health and Walgreens Boots Alliance, Inc. in the changing pharmacy landscape as scale has become increasingly more important in today's competitive environment within the pharmacy sector. Prior to October 2018, Rite Aid's focus for about 3 years had been on its sale, first to Walgreens which was scuttled by the FTC and then to Albertsons which was terminated as majority of its shareholders were expected to reject the deal. Rite Aid did sell about half its stores and a couple of distribution centers to Walgreens for about $4.375 billion and used the proceeds to repay debt. However, in the midst of all this deal making the operating performance of the company faltered as customers had no incentive to sign new contracts with Envision and the number of prescriptions filled at Rite-Aid declined. The company was also unable to offset reimbursement rate declines with generic purchasing efficiencies. Therefore EBITDA and free cash flow has declined significantly resulting in deteriorating credit metrics. The rating also incorporates the possibility of further distressed exchanges.

Moody's expects Rite Aid's lease adjusted debt/EBITDA to be about 6.0x at the end of this fiscal year ending February 2020 and we expect only modest improvement in leverage in next 12 months. The rating also reflects the company's modest free cash flow EBIT/interest at below 1.0 times in the next 12 months. Positive ratings consideration is given to Moody's expectation that new management will focus on cost reduction, inventory rationalization, store remodels, growth in the Envision RX traditional PBM business, increase the level of script growth through increased traffic and file buys and strategically target participation in limited and preferred networks to boost the top line. Rite Aid's adequate liquidity, and the relative stability and positive longer term trends of the prescription drug industry are other positive rating considerations.

The negative outlook reflects the uncertainty in management's ability to improve operating performance and credit metrics in the next 12 months given the current competitive business environment in the pharmacy sector and much larger and well capitalized peers in this space.

An upgrade would require Rite Aid's, operating performance to improve or absolute debt levels to fall such that the company demonstrates that it can maintain debt/EBITDA below 6.0 times and EBIT to interest expense above 1.0 times. In addition, a higher rating would require Rite Aid to continue to maintain at least an adequate liquidity profile.

Ratings could be downgraded should the likelihood of a default increase for any reason or if Rite Aid experiences a decline in revenues or earnings or increases debt such that debt/EBITDA is likely to remain above 7.0 times and EBIT to interest expense is likely to remain below 1.0 times. Ratings could also be downgraded should liquidity weaken including free cash flow remaining negative or the company does not get any traction on new PBM contracts or if prescription volumes decline.

Rite Aid Corporation operates 2,464 drug stores in 18 states. It also operates a full-service pharmacy benefit management company (Envision Rx). Revenues are about $22 billion.

The principal methodology used in these ratings was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Manoj Chadha
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Janice Hofferber, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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